Wealthy Families Leveraging Up

By Richard C. Morais

“In this environment of general deleveraging—nations are deleveraging, individuals are deleveraging—we’re actually seeing the high-net-worth space taking on leverage. Our lending business is up 66%, year on year.”

We were at the New York restaurant Vitae when Mark Jordahl, president of the Minneapolis-based U.S. Bank Wealth Management, dropped the line that made my salad fork halt midway to my mouth. Not a lot can stop me from eating, I confess, but Jordahl oversees $37 billion in rich-folk assets at parent U.S. Bancorp (USB), which ranks his unit the 19th largest high-net-worth manager in the U.S. (“Best of Breed,” Sept. 17, 2012.)

So I listened extra hard when the Midwestern banking executive talked about increased leverage, not least because spotting a new investment trend among the wealthy is like spotting a new car technology at the Formula One races; usually a version of the new technology eventually shows up in mass-­market cars. Everything from hedge funds to tax-sheltered IRAs were product ideas that made their way downstream in some form after first getting a foothold among the gilded set.

Jordahl reminded me that his clients “don’t typically borrow because they have to borrow,” but rather “lever up because of opportunity.” So this new leverage reflects the fact that America’s wealthy are feeling better about the markets and are using debt to aggressively take advantage of buying opportunities, whether in real estate or in the broader market.

“It’s ­really the reverse of, ‘If I buy a 10-year Treasury, how can I possibly have a positive real return over 10 years?’ In this case, it’s, ‘If I borrow at 3%, how can it possibly not work out if I am reasonably patient?’ ” The new leverage is another sign of the “feel good” rise that Penta documented in its recent cover story on ­private-bank asset allocations (“More Stocks, Fewer Bonds,” March 4, 2013).

As we moved on to the crisply grilled arctic char in a broth with some very weird-looking mushrooms, I asked Jordahl to give me his take on how the markets will continue performing in 2013. “I said last year, ‘I think 2013 will have healthier investment sentiment, and less-healthy market returns.’ So far, it’s been a really healthy market return, and healthy investor sentiment.”

The West Coast-cool of Ascent Private Capital Management. It’s Mark Jordahl’s private bank for families with more than $50 million to invest. Credit: Architect Garcia Tamjidi / Photo Joe Fletcher

After the usual caveats about the reckoning coming due on deficits and cheap money, Jordahl predicted the markets have another 6% or 7% to climb before year’s end, partly because his clients’ deposits are also up significantly. “We’re still seeing investors parking money on high-quality balance sheets, so there is a lot of fuel there to find its way into the market. Our deposits are up nearly 60%, year on year.” By the end of 2013, Jordahl predicts, there still “won’t be inflation” but a sober discussion “about when the Fed will take away the punch bowl.”

Jordahl, 52, is silver-haired and surprisingly easy to make laugh—not the usual stony countenance I come across in private- bank chambers. I suspect that he isn’t on a lot of radars because he hides out in Minneapolis, far from the traditional money centers. But high-net-worth client balances (assets under management, deposits, and lending to clients with more than $5 million) have risen 24% since Jordahl took charge in 2008.

His sprawling operation is now a three-tier wealth pyramid with a total $110 billion in assets under management: The Private Client Group handles clients with more than $100,000 in investable assets. The Private Client Reserve—which sounds like a particularly good Sauvignon Blanc from New Zealand—serves clients with more than $1 million to invest. Jordahl then launched, in 2011, Ascent Private Capital Management, a dedicated private bank within U.S. Bank for clients with $50 million or more. It’s a cordoned-off playpen for the seriously rich.

Ascent currently has 70 family clients with an average of $200 million each, and announced its arrival on the scene by unveiling offices by the San Francisco architects who designed the Pixar Animation Studios. The bank’s minimalist rooms and decor emulate a hip boutique hotel, and include family “learning labs,” where the white walls can be written on and the furniture moved around. Ascent regularly hosts “a sit-down dinner for 20 clients,” says Jordahl, so clients feel as if they are part of the office and can start a dialogue with other members of their tribe. Ascent will be running its funky shops from Minneapolis, Cincinnati, Denver, Seattle, and San Francisco by the end of the year.

“There is plenty of mahogany out there,” he said. “We didn’t need to replicate that. We’re designing a model we think is quite different. The office space is consistent with that idea.”

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MARCH 29, 2013 4:59 P.M.

H. Craig Bradley wrote:

U.S. BANK ESCHEWS RISK WITH BANK MONIES

Knowning how U.S. BANK operates, I am not surprised their wealthy clients are "leveraging-up" of late. U.S. BANK is in the business of extending credit and its usually profitable for them with all customer levels. The lender's risk is minimal with ultra-high net worth individuals, which may have something to do with it in the first place. My guess is they were "encouraged" to utilize leverage. All it takes is a little greed to begin with and anything is possible later on.

In addition, there is some evidence of ordinary investors generally stepping-out a bit on the risk scale or becoming "more aggressive" this year. I think the Facebook IPO last May was a good example illustrating the mindset of many well-off retail investors. So, its a progression back to risk assets. This could be the set-up we have all been looking for as sidelined cash or bond money rotates into equities and risk assets. ( The so-called "great rotation" has yet to materialize, however).

U.S. BANK is very tight and extremely conservative with their money. Keep that in mind if I were you.
Just remember Oct. 1929 when the public mood went from optimistic (buy) to SELL, Sell, Sell. The market was highly leveraged back then and it collapsed with a fruious crash. When interest rates begin to rise sometime next year , "risk off" could suddenly restart, and leveraged investors might experience much higher losses in their open positions. A serious correction might be on tap in 2014. Taking risks is O.K., but you seldom get rewarded for taking "brash risks", General George Scott Patton.

MARCH 30, 2013 11:48 A.M.

Anonymous wrote:

Reply to Mr. Bradley:

Considering the leverage induced near-Depression we just avoided, I think another market crash induced
by leverage is not likely any time soon, and certainly not one that would harm these high end investors out in Minneapolis who are tip-toeing into a little low-cost money to increase their holdings (although for the life of me I don't see any reason for them to do so, other than that their banker talked them into it).

APRIL 2, 2013 10:01 P.M.

TiredOfFlippingTheBill wrote:

I would be a little leary of a lot of leverage right now. I think that the market is overheated and ready for a correction. Just don't know when. Being highly leveraged increases the loss.

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Written with Barron’s wit and often contrarian perspective, Penta provides the affluent with advice on how to navigate the world of wealth management, how to make savvy acquisitions ranging from vintage watches to second homes, and how to smartly manage family dynamics.

Richard C. Morais, Penta’s editor, was Forbes magazine’s longest serving foreign correspondent, has won multiple Business Journalist Of The Year Awards, and is the author of two novels: The Hundred-Foot Journey and Buddhaland, Brooklyn. Robert Milburn is Penta’s reporter, both online and for the quarterly magazine. He reviews everything from family office regulations to obscure jazz recordings.